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Budget '07-'08: PC's post-Budget interview

Chidambaram explains the finer nuances of the Union Budget 2007-08.

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• Budget '07-'08: PC's post-Budget interview

Keywords: Interview, Post-budget

Raghav: So in April and July, in the credit policy we could get these things?

Chidambaram: I trust the Reserve Bank completely and I am sure that Dr Reddy will ensure that there is ample liquidity in the market.

Raghav: The last one is on the depreciation of the rupee. We are all celebrating a current account deficit saying India is growing so fast and we are getting so many dollars in from overseas. So we can live with high current account deficit. That’s a nice little fiction that everybody has created.

Chidambaram: It is not a fiction. Both Dr Reddy and I and the Prime Minister and everyone in government believe that a developing country must have a current account deficit.

Raghav: Just a few years ago, it was a stated objective of the government to move towards the zero current account deficits.

Chidambaram: That was a wrong objective by a government, which did not understand the needs of a developing economy.

Raghav: Are we then going to live with current account deficits in the range of 3 or 4%?

Chidambaram: Not with 3, or 4%. We can live with a current account deficit between 2 - 3 %. That is the surest way to ensure that foreign investment flows into the country.

Raghav: Have you ever considered the fact that if the capital inflows from overseas don’t continue to be as robust as they are today?

Chidambaram: Alarmist argument. There is no reason to believe that. Today IMF and all developing countries have recognised that remittances are today a stable component in capital flows. Every country now counts remittance as a pretty stable component. There is no reason why India should not count remittances as a stable component.

Raghav: Would you also not like to be far more aggressive in getting FDI into the country?

Chidambaram: We are. We are trying to bring FDI into the country but we have only so much political space. Within the political space we are trying. We went to Davos. We have this India campaign everywhere.

If we put FDI and FII as separate disparate elements, the number crosses 100 in some cases, then we have to bring down the FDI cap. That sends a wrong signal. Therefore, the better course is to have one cap and make FDI and FII fungible.

Raghav: Where do you the Rupee is going to settle? It has been showing a depreciating trend.

Chidambaram: That is not correct again. The real effective exchange rate when I last saw it was 106 or so. So you are looking at the nominal exchange rate, the Governor and I are looking at the real effects of exchange rate.

Raghav: Businesses are done on a nominal exchange rate.

Chidambaram: Not quite. If they hedge they don’t do it on nominal exchange rate, they take positions, they hedge Rupee also. We have to look at the real effective exchange rate.

The foreign exchange rate does not enter the Budget numbers because we are working on Rupees. But we take the Reserve Bank’s reference rate if we have to calculate anything on any particular day. Today the Rupee is moving between 44 and 43.75 - 43.80 in that range. As long as it moves on that band, I don’t think there is any reason to worry. Really we should be looking at ReR (real exchange rate).